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Converting Hospitals from Not-for-profit to For-profit Status

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  • David M. Cutler
  • Jill R. Horwitz

Abstract

Over the past twenty-five years, about 330 (7 percent) of the country's 5,000 not-for-profit hospitals have converted to for-profit form This paper explores the causes and effects of conversions through two case studies -- Wesley Medical Center in Wichita, Kansas and the Columbia/HealthOne system in Denver, Colorado. We identify two primary explanations of why hospitals convert: financial concerns and board culture-perceived mission. Financial concerns are multifaceted and include expectations about future profits, anticipated problems servicing debt, and pessimism regarding the future of government reimbursement policies. The effects of these conversions are mixed. There are some efficiencies associated with conversions such as cost-cutting, increased access to capital, and debt-burden relief. However, profits are often derived from increasing reimbursement from the public sector. Further, conversions are likely to cause fragmentation of the hospital market between rich and poor. The results show that not-for-profit hospitals are likely to copy the undesirable behavior of for-profit hospitals in their markets.

Suggested Citation

  • David M. Cutler & Jill R. Horwitz, 1998. "Converting Hospitals from Not-for-profit to For-profit Status," NBER Working Papers 6672, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:6672
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    1. Jason Barro & David M. Cutler, 2000. "Consolidation in the Medical Care Marketplace,A Case Study from Massachusetts," NBER Chapters,in: Mergers and Productivity, pages 9-50 National Bureau of Economic Research, Inc.
    2. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
    3. Richard G. Frank & David S. Salkever, 1994. "Nonprofit Organizations in the Health Sector," Journal of Economic Perspectives, American Economic Association, vol. 8(4), pages 129-144, Fall.
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    Cited by:

    1. Laurent Gobillon & Carine Milcent, 2013. "Spatial disparities in hospital performance," Journal of Economic Geography, Oxford University Press, vol. 13(6), pages 1013-1040, November.
    2. Edward L. Glaeser, 2002. "The Governance of Not-For-Profit Firms," NBER Working Papers 8921, National Bureau of Economic Research, Inc.
    3. Edward L. Glaeser, 2002. "The Governance of Not-for-Profit Firms," Harvard Institute of Economic Research Working Papers 1954, Harvard - Institute of Economic Research.
    4. Huckman, Robert S., 2006. "Hospital integration and vertical consolidation: An analysis of acquisitions in New York State," Journal of Health Economics, Elsevier, vol. 25(1), pages 58-80, January.
    5. Jill R. Horwitz, 2005. "Does Corporate Ownership Matter? Service Provision in the Hospital Industry," NBER Working Papers 11376, National Bureau of Economic Research, Inc.
    6. Mark Duggan, 2000. "Hospital Market Structure and the Behavior of Not-for-Profit Hospitals: Evidence from Responses to California's Disproportionate Share Program," NBER Working Papers 7966, National Bureau of Economic Research, Inc.
    7. Elaine Silverman & Jonathan Skinner, 2001. "Are For-Profit Hospitals Really Different? Medicare Upcoding and Market Structure," NBER Working Papers 8133, National Bureau of Economic Research, Inc.
    8. Laurent Gobillon & Carine Milcent, 2008. "Regional disparities in mortality by heart attack: evidence from France," Working Papers halshs-00586837, HAL.
    9. C. Du Bois & R. Caers & M. Jegers & C. Schepers & S. De Gieter & R. Pepermans, 2004. "Agency problems and unrelated business income of non-profit organizations: an empirical analysis," Applied Economics, Taylor & Francis Journals, vol. 36(20), pages 2317-2326.
    10. Paul A. Grout & Michelle J. Yong, 2003. "The Role of Donated Labour and Not for Profit at the Public/Private Interface," The Centre for Market and Public Organisation 03/074, Department of Economics, University of Bristol, UK.
    11. Janet Currie & Mehdi Farsi & W. Bentley Macleod, 2005. "Cut to the Bone? Hospital Takeovers and Nurse Employment Contracts," ILR Review, Cornell University, ILR School, vol. 58(3), pages 471-493, April.
    12. repec:hal:journl:halshs-00879787 is not listed on IDEAS
    13. Glaeser, Edward L. & Shleifer, Andrei, 2001. "Not-for-profit entrepreneurs," Journal of Public Economics, Elsevier, vol. 81(1), pages 99-115, July.
    14. Leemore S. Dafny, 2003. "How Do Hospitals Respond to Price Changes?," NBER Working Papers 9972, National Bureau of Economic Research, Inc.
    15. Marco Castaneda & Dino Falaschetti, 2008. "Does a Hospital’s Profit Status Affect its Operational Scope?," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 33(2), pages 129-159, September.
    16. Gillian Currie & Cam Donaldson & Mingshan Lu, 2003. "What Does Canada Profit from the For-Profit Debate on Health Care?," Canadian Public Policy, University of Toronto Press, vol. 29(2), pages 227-251, June.
    17. Jonathan S. Skinner & John Wennberg, 2000. "How Much Is Enough? Efficiency and Medicare Spending in the Last Six Months of Life," NBER Chapters,in: The Changing Hospital Industry: Comparing For-Profit and Not-for-Profit Institutions, pages 169-194 National Bureau of Economic Research, Inc.
    18. Jill R. Horwitz & Austin Nichols, 2007. "What Do Nonprofits Maximize? Nonprofit Hospital Service Provision and Market Ownership Mix," NBER Working Papers 13246, National Bureau of Economic Research, Inc.
    19. Pierre Koning & Joëlle Noailly & Sabine Visser, 2007. "Do Not-For-Profits Make a Difference in Social Services? A Survey Study," De Economist, Springer, vol. 155(3), pages 251-270, September.
    20. Richard Arnould & Marianne Bertrand & Kevin F. Hallock, 2000. "Does Managed Care Change the Mission of Nonprofit Hospitals? Evidence From the Managerial Labor Market," NBER Working Papers 7924, National Bureau of Economic Research, Inc.

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